Time-Weighted Rate of Return (TWRR)

The Time-Weighted Rate of Return (TWRR) is a measure of the compound_growth rate in a portfolio. Its superpower is that it completely ignores the effects of money being added to or taken out of the account. Think of it as a pure performance metric. It isolates the investment strategy's success from the investor's decisions about when to buy or sell. This makes it the gold standard for comparing the skill of different fund managers or the performance of various investment strategies. If you want to know how well the actual stocks, bonds, or other assets in a fund performed, independent of the chaotic timing of investor deposits and withdrawals, the TWRR is the number you look for. It answers the simple question: “How much would an initial dollar have grown if it were left untouched throughout the period?”

The magic behind the TWRR lies in how it breaks down time. Instead of looking at the entire investment period as one lump, it divides it into smaller sub-periods, with each new period beginning whenever a cash_flow (a deposit or a withdrawal) occurs.

Imagine you want to calculate the TWRR for your portfolio over one year. The calculation follows these simple steps:

1. Step 1: Slice the Timeline. Your one-year period is sliced into smaller chunks every time you add or remove money. If you started with $10,000 on January 1st, added $2,000 on July 1st, and ended the year on December 31st, you have two sub-periods:
   • Period 1: Jan 1 - June 30
   • Period 2: July 1 - Dec 31
2. Step 2: Calculate the Return for Each Slice. You calculate the simple return for each individual sub-period. The formula is: (End Value - Beginning Value) / Beginning Value.
   • Important: For Period 2, the “Beginning Value” includes the new cash deposit.
3. Step 3: Link the Slices Together. The returns from each sub-period are then geometrically linked (a fancy way of saying they are multiplied together) to get the total return for the year.

Let's put some numbers to it:

1. Jan 1: You invest $10,000.
2. June 30: Your portfolio is now worth $11,000. You decide to add another $5,000.
3. Dec 31: Your total portfolio is now worth $18,400.

Let's calculate the TWRR:

• Period 1 (Jan 1 - June 30):
  • Return = ($11,000 - $10,000) / $10,000 = 0.10 or 10%
• Period 2 (July 1 - Dec 31):
  • The starting value for this period is the $11,000 it was worth plus your $5,000 deposit. So, Beginning Value = $16,000.
  • Return = ($18,400 - $16,000) / $16,000 = 0.15 or 15%
• Linking the periods:
  • We add 1 to each return: (1 + 0.10) and (1 + 0.15).
  • We multiply them: 1.10 x 1.15 = 1.265.
  • Finally, we subtract 1: 1.265 - 1 = 0.265.

Your Time-Weighted Rate of Return for the year is 26.5%. This reflects the pure performance of your investments, untainted by your decision to add $5,000 mid-year.

The TWRR is often confused with its cousin, the money-weighted_rate_of_return (MWRR), also known as the internal_rate_of_return (IRR). Understanding the difference is crucial.

• TWRR measures the manager's performance. It tells you how good the strategy is. This is why it's used by mutual_funds and exchange-traded_funds (ETFs) in their official reports. It creates a level playing field for comparison.
• MWRR measures the investor's experience. It tells you what return you actually earned on your money. It is heavily influenced by the timing and size of your personal cash flows.

Think of it this way: The TWRR is like a car's EPA-rated miles-per-gallon. It's a standardized measure of the machine's efficiency. The MWRR is your car's actual MPG, which is affected by your personal driving habits—how fast you accelerate, how often you brake, and the roads you choose.

For a disciplined value_investor, both metrics tell an important story. When you're researching a fund or a money manager, always focus on the TWRR. It strips away the noise and shows you the manager's true stock-picking talent (or lack thereof). You want to evaluate the strategy on its own merits. However, when you review your own brokerage statement, the MWRR tells you the unvarnished truth about your personal investment journey. It's your real-world return. A disciplined, long-term investor who buys and holds should find that their personal MWRR tracks the TWRR of their chosen investments quite closely over time. If there's a large, persistent gap between the two—for instance, if the fund's TWRR is 10% but your MWRR is only 4%—it's a massive red flag. It likely means your own behavior (e.g., panic selling during downturns or excitedly buying at market tops) is destroying your wealth. In this case, the problem isn't the investment; it's the investor.